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The Macroeconomic Effects of a Switch from Direct to Indirect Taxes: An Empirical Assessment


  • Madsen, J
  • Damania, D


This paper investigates the macroeconomic effects of switching the tax burden from direct to indirect taxes in an empirical model based on twenty-two OECD countries. The Engle-Yoo (1989) three-step procedure is employed to estimate both the short- and long-run effects of such a tax switch. The results reveal that a switch from direct to indirect taxes is likely to generate efficiency gains in the short run which lead to higher levels of aggregate output. However, for the majority of countries in the sample, the tax changes have no impact on the level of economic activity in the long run. Copyright 1996 by Scottish Economic Society.

Suggested Citation

  • Madsen, J & Damania, D, 1996. "The Macroeconomic Effects of a Switch from Direct to Indirect Taxes: An Empirical Assessment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(5), pages 566-578, November.
  • Handle: RePEc:bla:scotjp:v:43:y:1996:i:5:p:566-78

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    Cited by:

    1. Jorge Martinez-Vazquez & Violeta Vulovic & Yongzheng Liu, 2011. "Direct versus Indirect Taxation: Trends, Theory, and Economic Significance," Chapters, in: Emilio Albi & Jorge Martinez-Vazquez (ed.), The Elgar Guide to Tax Systems, chapter 2, Edward Elgar Publishing.
    2. Munir, Kashif & Sultan, Maryam, 2016. "Are Some Taxes Better for Growth in Pakistan?A Time Series Analysis," MPRA Paper 68828, University Library of Munich, Germany.

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